Which principle states that property value tends to be set by prices paid for similar properties?

The principle that states property value tends to be set by prices paid for similar properties is known as the principle of substitution. This principle is foundational in real estate appraisal and asserts that a buyer will not pay more for a property than what they would pay for an equivalent property that offers comparable utility, condition, and location.

Essentially, if a property is overpriced compared to similar properties on the market, prospective buyers will gravitate towards those alternatives. This equalizing effect is critical for determining market value and is often used when conducting a comparative market analysis or when appraisers assess a property based on the sales of comparable properties.

In contrast, the other principles serve different functions within the appraisal process. For instance, the contribution principle relates to the incremental value added by a specific feature or improvement. The balance principle refers to the optimal relationship between various property elements and how they contribute to overall value. Utility encompasses the usefulness of a property to its owner or user but does not directly influence value comparison against similar properties like the principle of substitution does.